India - Uttar Pradesh Water Supply and Sewerage Project

FILECOPY GRCUULATNG COPY AI BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-=82-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE UTTAR PRADESH WATER SUPPLY AND SEWERAGE PROJECT August 6, 1975 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibilty for the accuracy or completeness of the report.  (For Inside Cover) CURRENCY EQUIVALENTS (as at June 30, 1975) US$1.00 * Rs. 8.35 Rs. 1.00 - US$0.120 Rs. 1 million US$119,760 (The Rupee is officially valued at a fixed Pound Sterling rate. As the Pound is now floating relative to the US Dollar, the US Dollar/Rupee exchange rate is subject to change. Conversions in the appraisal report were made at US$1 to Rs. 8.00, which is close to the short-term average exchange rate.) FISCAL YEAR April 1 - March 31  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF IHE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE UTTAR PRADESH WATER SUPPLY AND SEWERAGE PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Government of India (GOI) for the equivalent of US$40 million on standard IDA terms. The credit would support the program of the Government of the State of Uttar Pradesh (GUP) to reorganize the water supply and sewerage sector in the State, to construct piped water supply schemes in selected rural areas suffering from hardship due to inadequate water supply, and to improve the quality of water supply and sewerage systems in the five largest cities of the State. The proceeds of the credit would be made available by the G0I to the GUP as part of its normal plan allocation of funds to States for the development of water supplies and sewerage; currently, 30% of these funds are made available as grants and 70% as loans for 18 years, including 3 years' grace, at its prevailing standard interest rate for development projects. 1/ PART I - THE ECONOMY 2. An economic report, "Economic Situation and Prospects of India" (691a-IN dated May 1, 1975), was distributed to the Executive Directors on May 20, 1975. Country data sheets are attached as Annex I. 3. India is exceptional among the Bank Group's member countries for its size, diversity, and the difficulty of its economic conditions. While India's economic policies and performance have their shortcomings, the sheer magnitude of the task facing the Government must be recognized. Governing a country divided into more than 20 States with a population of some 600 million and over 60 languages is an extraordinary responsibility. The country's poverty, and inadequate domestic savings together with a net transfer of external resources averaging in recent years only about US$1 per head per annum, have imposed sharp limitations on the rate of growth. Account must be taken, also, of the uncertainties imposed by the erratic availability of water. A bad monsoon, which is inevitable from time to time, has a per- vasive influence over the entire economy and wipes out the results of years of efforts. Thus, the annual growth of national income has averaged a modest 4% during the past 25 years, but only about 1% during the last four years (1971/72-1974/75), which have included two consecutive monsoon failures -- i.e., an actual decline in per capita terms. 4. Since independence, progress has been impressive on many fronts, but disappointing on others and has all too often fallen short of India's massive needs. The growth of the socio-economic infrastructure (transport, education, health services, etc.) has been spectacular, but has often been achieved at high cost and has yielded results of variable quality. Many 1/ Parts I and II in this report are identical to the corresponding parts in the President's Report on the proposed Thirteenth Railway Project.  -2- industrial and agricultural investment schemes have been highly successful, but others have taken excessively long to be completed and have operated well below full capacity. In some regions of the coumtry, growth and structural change have been rapid and compare favorably with developments in many other parts of the world, but in other regions there has been stagnation and possibly even decline. Despite these improvements and al- though the distribution of income in India is relatively even by comparison with most developing countries, there has been little impact upon the living standards of the vast masses of the urban and rural population. The Govern- ment has become increasingly concerned about the plight of the lower income strata, which - conservatively measured - consist of some 200 million people with incomes of less than US$60 per head per year, and has initiated in recent years a variety of programs specifically designed to alleviate poverty. 5. The structure of the economy has been slow to change. Agriculture remains the dominant sector, accounting for some 45% of national product in the early 1970s compared with around 49% twenty years previously. The share of output contributed by the industrial sector has increased only slowly and, since the late 1960s, has remained approximately constant at a level of 23%. There has, however, been a shift in the composition of industrial production. with consumer, intermediate, and capital goods now contributing about one third each, compared with an overwhelming preponderance of consumer goods production 25 years ago. 6. Despite the slow pace of change and despite the undeniable magnitude of the problems confronting her, India has the potential in a number of important fields to mount a development effort which has a reasonable chance of success in the longer run. In agriculture, as discussed in the economic report of May 1975, the particular opportunities of substantial promise for improving the food situation over the next decade are: (a) Rejuvenation of the green revolution in wheat which has taken place in recent years in the Northwest and to a lesser extent in Bihar and West Bengal, but which has been losing momentum since about 1970. This is the result of deficiencies which can be corrected -- most importantly seed deterioration and lagging irrigation development. (b) Better use of the vast potentials that have been created by surface irrigation through more expeditious project completion and complementary land and on-farm improve- nents to ensure better management and higher productivity of water. (c) Acceleration of groundwater development, especially in the Eastern regions, whlich are figuratively described as "'flating on water,' where the untapped potential is large  - 3 - and where consequently there are large opportunities for multiple cropping, better water management and greater crop security. (d) Prouiotion of increased production of monsoon rice, based on improved varieties which as yet have had only modest success but which are expected, on the basis of current research, to open the way to much greater productivity over India's vast rain-fed rice producing areas during the next few years. (e) Pursuit of the promising, althoughi somewhat less definite, potential for greater productivity in dryland cultivation and for extensive introduction of higher yielding varieties of coarse grains. Because of the difficulties likely to be encountered in the effective devel- opxaent of these potentials, their realization is likely to follow uneven time patterns, probably coming in bursts of expanded production as in the case of the green revolution. And, along with administrative concentration and effectiveness, they will all require provision of the supplies and services, especially fertilizer and power for irrigation, which are essential complements of the necessary technical and environmental changes. 7. Greater agricultural success would also make an important contribu- tion to India's perenially difficult balance of payments situation, which is frequently aggravated by the need for large food imports, From the balance of payments viewpoint, another essential ingredient for a resumption of modest growth is sustained export volume growth at considerably higher rates than have been achieved historically. In view of the composition of Indian exports, the momentum for such growth would have to be provided primarily by the rapid expansion of industrial exports which, in addition to easing the foreign exchange constraint, would act as an important stimulant to industrial growth -- notably absent since the mid-sixties. In the field of energy, too, there is considerable potential in the development of recent- ly discovered oil resources and in the continued expansion of coal production. 8. It is hard, however, to conceive of the timnely and effective exploitation of these various potentials unless adnministrative capabilities, which are overtaxed and diffused in an attempt to guide and control most economic activities, are focused on these areas. The requirement for industrial export stimulation would appear to be more generous and expeditious incentives, sufficiently attractive and reliable to induce domestic producers to venture into the competitive pressures of world markets. Finally, realization of India's potential will undoubtedly also require a considerable infusion of external assistance, both to ease the payments constraints and to supplement the limited domestic resources available for development.  - 4- 9. While there is thus potential for resuming the interrupted process of growth, there remains the formidable obstacle of the current difficulties facing India. The short-term problem is much the same as it appeared last year, with the important exception that the efforts made to adjust to changed circumstances and the responsiveness of aid givers to India's needs shiould mitigate the hardships that lie ahead. Last year began with deficient winter rains and a poor spring harvest, with one of the worst Government wheat procurement experiences on record, with a prospective balance of payments deficit of US$2.5 billion or twice as much as in the preceding year, with inflation running at an annual rate of 30% and a fiscal situation seemingly out of hand, and with serious energy and material shortages and little prospect for alleviating them through imports within the severe constraints of the balance of payments. It was hardly surprising in this situation that adjustment to immediate difficulties was the prime economic preoccupation. Growth had necessarily to take a second place to short-run exigencies in the emphasis of economic policy in this first year of the Fifth Five-Year Plan period. 10. Monetary expansion, which had been running at a rate of 15% in 1973/74, was reduced through tight credit restrictions. The burden of these restrictions was borne largely by private and Government commercial activities, without a significant reduction in the rate of increase in net bank financing of the Government Budget. To this curtailment of credit to the commercial sector, there was added the deflationary influence arising from the net use of reserves and as a result the rate of monetary expansion in 1974/75 was reduced to about 6%, or less than half that of the previous year. This, in combination with some improvements in physical supply, relieved the upward pressure on prices, and there was even a small price reduction in the second half of the fiscal year. With continuing tiglht monetary policies, prospects are for greater price stability this year than last. 11. The food problem was probably the single most threatening element on the economic scene last year. A poor harvest and low procurement in the spring was only the start of agricultural adversities. Next was failure of the mid-year monsoon in many key agricultural areas and a monsoon (kharif) crop which fell below that of 1973 by about 5 million tons. T1he result was a severe shortage of domestic foodgrains for the public distribuition system, with availabilities only about half of an austere level of requirements. A real food crisis was avoided, however, by imports of more than 6 million tons of foodgrains during the year ending in March 1975; this was almost twice as much as the imports of 1973/74. With these imports and with relative empha- sis on food distribution in the cities rather than the countryside, whiere supply'conditions were presumed to be not quite so unmanageable, the threat- ening food situation was weathered, although not without hunger and priva- tion for a great many of the rural poor who were uwable to afford much of what food was available.  -5- 12. The oil situation was managed, although at double the cost for a reduced import level, by curbs on consumption and by substitution. Motor spirits were heavily taxed to reduce-consumption by about 20%; factories and power plants were converted from fuel oil to coal wherever possible and supplies of fuel oil were reduced by more than 15%; coal production, after years of stagnation, was increased by about 13%, and, after a poor start, transport managed to keep up with the additional coal in spite of serious labor troubles on the railways. There was also some improvement in the operation of the deficient power system through special efforts to raise the low capacity utilization of thermal plants and by a more systematic allo- cation of available power, with special priority for requirements of agri- cultural irrigation and fertilizer production. Power shortage has remained, nevertheless, a severe constraint on the economies of many regions. Among other critical shortages, the supply situation eased in the course of the year, especially for fertilizer, steel and non-ferrous metals. The fertilizer situation was brought into better balance by a combination of substantial imLports and some lag in demand attributable largely to poor weather and sharply increased prices. Steel and other metal supplies also improved during the year, with some increase in domestic production in the case of steel and also because of price resistance and uncertainty in a sluggish industrial situation. 13. Last year's balance of payments turned out to be manageable in spite of a 45% jump in the import bill. Economies in import volume helped. More importantly, there was also an increase of 22% in the value of exports. The main payments support, however, was an increase of about US$1 billion in external financing, made up of large drawings on the International Mone- tary Fund including the Fund's Oil Facility, larger aid from the India Consortium including the World Bank Group, oil purchases on credit, a mil- lion tons of wheat on loan from the USSR, and additional food aid from several other countries. With all this, in 1974/75, India had to draw on its gross reserves (US$1,416 million of March 31, 1974) by only about US$50 mil- lion, but external debt service requirements in the medium term were increased, as were obligations to the IMF. 14. This year (1975/76), the economic situation has started more favor- ably than last year, with the expectation of a better harvest and larger procurement from the spring (rabi) crop, with easier conditions in other material supplies, and with much less inflation. However, the payments situation is no less critical. 15. I The 1975/76 trade deficit is projected at about US$2,025 million. This compares with about US$1,815 million last year, but with hardly any trade deficit at all in 1972/73, which was before India's terms of trade worsened sharply as prices of imported oil, grain, fertilizer and other essential goods went up. Adding to the 1975/76 trade deficit another US$800 million of payments on external obligations, and taking account also of probable net invisible receipts, this year's overall balance of payments deficit seems likely to come to about US$2,635 million, or about US$160 million more than last year. These enormous deficits persist in any reasonable calculation of  - 6 - minimum itmport requirements of fuel, food, fertilizer and other essentials, for which further compression seems hardly feasible, even at the low level at wlhich the economy is functioning. 16. Fortunately, nearly half of this year's prospective deficit (about US$1,155 million) can be covered from gross disbursements of previously committed foreign aid, including just over a billion dollars of Consortium aid about evenly divided between bilateral and World Bank Group sources. Eastern Europe is expected to provide perhaps US$100 million, which is down considerably from last year in the absence of further food assistance from the USSR. All this leaves a balance of US$1,500 million to be financed from disbursements out of new aid commitments in the current year and to some extent by an inevitable drawdown of foreign exchange reserves which stood at US$1,365 million at March 31, 1975. 17. To highlight the crucial variables in India's longer-term payments outlook, the May 1975 economic report contains some projections, for the 10 years following 1975/76, illustrating India's debt management problem. Broadly speaking, the conclusion which emerges is that a modest increase in India's import capability - an average of 5.2% per annum after allowing for inflation - could be achieved, provided: (i) new aid commitments in real terms (including IMF facilities and the aid provided by oil producers) remain approximately at 1974/75 levels, (ii) India's exports attain an average volume growth of about 8% between 1976/77 and 1985/86, and (iii) the bulk of new aid continues to be provided on concessional terms. Given the above assumptions, the debt service ratio (expressed as a percentage of export earnings) would rise from about 19% in 1974/75 to 23% in 1979/80 and then decline slowly. India's external public debt outstanding and disbursed on March 31, 1974 stood at US$10.2 billion. 18. A considerably improved export performance, which will require policy measures to improve incentives, is crucial to a successful development effort. To the degree that exports fall short of the 8% growth target, India's creditworthiness will be reduced, and she will face greater dif- ficulty in borrowing to meet a larger balance of payments deficit; the re- sult would be slower growth throughout the economy. PART II - BANK GROUP OPERATIONS IN INDIA 19. Since 1949, the Bank Group has made 44 loans and 73 development credits to India totalling US$1,437 million and US$3,428 million (both net of cancellation), respectively. Of these amounts, US$692 million has been repaid, and US$1,538 million was still undisbursed as of 1975. Annex II contains a summary statement of disbursements as of June 30, 1975, and notes on the execution of ongoing projects. 20. Since 1957, IFC has made 14 commitments in India totalling US$51.8 million, of which US$8.4 million has been repaid, US$7.6 million sold and  US$6.3 million cancelled. Of the balance of US$29.5 million, US$22.4 million represents loans and US$7.1 million equity. A summary statement of IFC operations as of June 30, 1975 is also included in Annex II (page 2). 21. In recent years, the emphasis of Bank Group lending has been on agriculture. The Bank Group has been particularly active in supporting minor irrigation and other on-iarm investments through agricultural credit operations. Major irrigation, marketing, seed development, and dairying are other agricultural activities supported by the Bank Group. Also, the Bank Group has been active in financing the expansion of output in the fertilizer sector and, through its sizeable assistance to development finance institu- tions, in a wide range of geographically scattered medium- and small-scale industrial enterprises. IDA financing of industrial raw materials and com- ponents for selected priority sectors has been instrumental in facilitating better capacity utilization in industry. The Bank Group has also been active in supporting infrastructure development for power, telecommunications, and railways. Family planning, education, water supply development, and urban investments have also received Bank Group support in recent years. 22. The direction of assistance under the Bank/IDA program has been consistent with India's needs and the Government's priorities. The emphasis of the program on agriculture, industry, power, and transport remains highly relevant. The priority of the agricultural sector has been further enhanced by the present world commodity situation. Thus, projects designed to foster agricultural production through the provision of essential inputs such as credit for on-farm investments, command area development of existing irriga- tion schemes, and seed production fonr an important aspect of the Bank Group's program for the next years. Special emphasis will be given to projects bene- fitting small farmers. Lending in support of infrastructure and industrial investments will focus on energy-related projects. Repeater credits for power and railways have high priority in this context, and discussions are under way with the Government in an effort to identify and prepare projects specifically designed to facilitate coal transport. Lending for fertilizer projects, which has been an important feature in recent years, is expected to continue to occupy a prominent place in the future program. 23. The need for a substantial net transfer of external resources in support of India's economy has been a recurrent theme of Bank economic reports and of the discussions within the India Consortium. The need for readily usable foreign exchange assistance is especially pressing at a time when output and investment have to be adjusted to a radically different price situation. Consequently, Bank Group lending for critical industrial raw materials and components continues to be an essential element within the overall program of assistance. As in the past, Bank Group assistance for projects in India should include, as appropriate, the financing of local expenditures. India imports relatively few capital goods because of the capacity of the domestic capital goods industry. The import component of projects tends to be especially low in such high-priority areas as agricul- ture, education, and family planning. For the Bank Group to be able to make an appropriate contribution to the financing of projects in these sectors, it is important to cover a proportion of local expenditures.  -8- 24. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1969/70 the Bank Group accounted for 34% of total commitments, 13% of gross disbursements, and 12% of net disbursements as compared with an estimated 35%, 28% and 42%, respectively, in 1973/74, and the contribution of the Bank Group is expected to continue growing. Whereas on March 31, 1974, the Bank Group's share of India's outstanding external public debt was 23%, by 1979 it is likely to account for about 25%. Because Bank Group assistance to India is predomi- nantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1974/75 about 14% of India's total debt service payments were to the Bank Group. PART III - THE WATER SUPPLY AND SEWERAGE SECTOR IN UTTAR PRADESH 25. Responsibility for the development of the water supply and sewer- age sector is divided among the Government of India and the States, which delegate powers and functions to local government authorities. GOI pre- pares the national investment plan for water supply, sewerage and pollution control. Investment resources are provided as part of the grant and loan assistance by the Center to the States for the implementation of Five-Year Plans. The State Governments are responsible for the planning and funding of individual water supply and sewerage schemes. They usually rely on their own departments for detailed design and construction of projects. The oper- ation and maintenance are functions of local authorities, but State Govern- ments are increasingly having to assume these functions because of local authorities' inability to carry them out. 26. The sector has not generated any significant resources for reinl- vestment in new schemes for many years. Available resources are unable to provide for annual population increases, and the sector is faced with an ever-increasing backlog of work -- with obvious implications for the incidence of water-borne diseases and the productivity of the affected population. 27. Uttar Pradesh (UP) faces most of the typical problems of the water supply sector in India. Only about 30% of the UP population of about 95 million have access to safe water supplies. Of the 293 towns with water supplies serving almost 13 million people, 112 have no safe systems and 86 require major improvements to continue safeguarding supplies. As for rural water supply, only about 3 million people in 5,000 villages have piped systems, and the responsible local bodies have been unable to properly operate and maintain these systems for want of trained staff and funds. 28. Since 1949, the main GUP agency responsible for the sector has been the Local Self-Government Engineering Department (LSGED). Originally a quality control agency, it became increasingly concerned with planning, design and construction of water supply and sewerage schemes, and with assisting the more than 500 local bodies responsible for the development and  -9- operation of such schemes, many of which had inadequate technical expertise. GUP loans and grants for capital expenditures by local bodies were channelled through LSGED, which executed the work on behalf of local bodies. In some instances, LSGED retained control over newly built systems when the local bodies could not operate or finance them, and LSGED developed, with some success, tariffs and charges to cover the cost of operating and maintaining these systems. 29. In 1973, GUP realized that a more expeditious and extensive pro- vision of water and sewerage facilities would require considerable reorgani- zation of the sector including, as a long-term objective, the need to make it self-supporting. The GUP has a sector development program for the next 15 years which aims at: (i) completing a major reorganization of the sector institutions; (ii) introducing fiscal discipline into the sector, particularly in urban water undertakings; and (iii) providing adequate water supplies to an additional 25 million people in about 200 towns and about 30,000 villages in scarcity and hardship areas, and construction of a few urban sewerage systems. To achieve these objectives, GUP has issued an ordinance which provides for the development, maintenance and regulation of the sector, including the establishment of a UP State Water Supply and Sewerage Development Corpora- tion (the Nigam) and local water authorities (Jal Sansthans). Under this two-tier arrangement, the Nigam will be the principal sector organization at the State Government level, and the Jal Sansthans will be the regional or local level entities. Enactment of the provisions of this ordinance into law by the UP Legislative Assembly would be a condition of effectiveness of the proposed credit (Section 5.01(d) of Development Credit Agreement). The Nigam (UP State Water Supply and Sewerage Development Corporation) 30. The Nigam has been established under the ordinance as a public sector corporation, controlled by a Board with the Secretary of the UP Local Self Government Department as the Chairman of the Board. The Nigam is headed by a MIanaging Director, who will be assisted by a Finance Director. Its initial staff, organization and facilities are based on the LSGED, but these tare being expanded to include financial and administrative staff, which will result in a total establishment of about 6,000. The Nigam has agreed that the Association will be given an opportunity to review and com- ment on the qualifications and experience to be required for the posts of Managing Director and Finance Director, to inform IDA subsequently of any changes thereto, and to inform IDA prior to the appointment of persons to these posts (Section 3.01(b) of Project Agreement). Other assurances regarding the staffing of the Nigam are described in paragraph 45 below.  - 10 - 31. The Nigam's functions include promoting and ensuring the effi- cient provision of water supply and sewerage in UP and, in particular, ad- vising the GUP on sector policy, and monitoring and advising Jal Sansthans and all local bodies having water supply and/cr sewerage systems. Until Jal Sansthans have developed their own design and construction divisions, the Nigam will continue the LSGED role of planning, designing and construct- ing all water supply and sewerage schemes in UP. Ten to twelve Jal Sansthans are likely to be established in a phased program over 10-15 years; until the- are capable of carrying out their powers and duties, the Nigam will assist in their formation and execute some functions on their behalf. When Jal Sansthans can perform efficiently, the Nigam will revert to its primary role as the sector's monitoring, financing, and regulatory agency. The Nigam is also empowered to take over and operate local systems, if Jal Sansthans or local bodies should fail to perform their duties. 32. An important feature of the Nigam is its role as the sector finan- cing agency. It will receive all funds from all sources external to the sector, including loans, grants, and GUP subventions. 1/ Jal Sansthans will not be able to obtain funds, other than of their own generation, from any source other than the Nigam. 33. Thle Nigam's financing activities will be carried out through a Sector Loans Fund, an Operations Account, and a Sector Development Account. The two principal objectives of the Loans Fund - which will record all the Nigam's capital borrowing, on-lending, and repayment transactions - are (i) to borrow from governmental and institutional lenders for sector devel- opment; and (ii) to provide loans to water authorities at rates of interest commensurate with their financial and economic conditions. The Nigam will achieve these objectives by using grants and low-interest loans from the GUP, and by charging higher rates of interest to those authorities which can afford to pay. During the four-year period ending March 1979 the Nigam will receive about US$82.4 million equivalent in loans and US$22.5 million equivalent in grants to finance loans to Jal Sansthans and local bodies. The Nigam will also maintain the Operations Account in which will be recorded all of its personnel and operating expenditures on (i) planning, design, appraisal and construction supervision of projects, (ii) operation and maintenance of water supply systems temporarily taken over from authorities which have failed to meet their operational and/or financial obligations, and (iii) provision of advisory services, e.g. tariff studies or training, to sector authorities. To the extent pos- sible, these costs will be recovered from the benefiting authorities. 1/ A subvention is a Ways and Means Advance, which is made to support a local body having cash flow problems. Officially, subventions are repayable, but have become a support subsidy for local bodies in UP in recent years and are rarely repaid.  -. 11 - Any residual costs will be met from a Sector Development Account. The forecast cost of the Nigam's operations for the four years through March 1979 is US$28 million equivalent, of which the water authorities and local bodies are forecast to bear about US$19 million equivalent and GUP about US$6.6 million equivalent through the Sector Development Account. This latter Account will show the financing of the sector by GUP and all transfers between Jal Sansthans. Prior to credit effectiveness, the Nigam will receive working capital of about US$2 million equivalent from GUP (Section 5.01(e) of Development Credit Agreement). The Jal Sansthans (Water Authorities) 34. There will be two types of Jal Sansthans during the early years of sector development: (i) urban Jal Sansthans, which will provide water supply and sewerage services for large towns, and (ii) regional Jal Sansthans, which will provide these services in large areas comprising many smaller towns and the rural areas of a region. All water supply and sewerage services in a given area would be under the jurisdiction of a Jal Sansthan. Any local body can ask the GUP to create a Jal Sansthan and bring its water and sewerage systems within the new law. 35. Jal Sansthans will operate as public utilities, and will have a Board of Management with a GUP-appointed Chairman, a General Manager, repre- sentatives of GUP and the Nigam, and three local representatives. Their statutory functions include promoting and operating efficient systems of water supply, sewerage and drainage. Jal Sansthans will have a typical pub- lic utility-type organization with engineering, finance, and consumer service divisions, with staff drawn fro.n existing local bodies and from the Nigam. In large towns, the Municipal Corporations will serve as the Boards of Jal Sansthans; their staffs, based on the existing Water Supply and Sewerage Departments, will be headed by General Managers. Every Jal Sansthan-is re- quired to operate a Water Supply and Sewerage Fund, to which all revenues must be paid, and from which only expenditures on these services can be met; this will preclude the use of these revenues for other municipal services. After review and comment by the Association, Accounts Regulations prescrib- ing commercial-type accruals accounting will be introduced within three months after formation of a Jal Sansthan (Section 2.03 of U.P. Agreement). 36. A Jal Sansthan is required to regulate its rates of taxes and charges so as to enable it to meet the cost of operations, maintenance, and debt service, and achieve a rate of return on its fixed assets. The first tbree regional Jal Sansthans (Kumaon, Garhwal and Bundelkhand) will not be financially viable for some years because they are taking over ill-run urban and rural systems, including many where no attempt has been made in the past to recover service costs from consumers. As an example, forecasts indicate that Bundelkhand Jal Sansthan may need subsidies totalling US$2.0 million equivalent through 1978/79. 37. Outside the areas covered by Jal Sansthans, existing local bodies will continue for some years to be responsible for their water and sewerage  - 12 - systems, with the Nigam acting as the Government's supervisory and regula- tory agency. When the Nigam lends to other local bodies, it will obtain re- forms similar to those proposed for the Jal Sansthans when executing agree- ments to finance and construct schemes. PART IV - TIE PROJECT 38. In 1972, the GOI requested IDA to assist the GUP in financing extensions and improvements to the KAVAL towns' 1/ water supply and sewerage systems. At IDA's suggestion, a IHO mission, under the IBRD/WHO Cooperative Program, surveyed the sector in 1973. Their report highlighted the need for institutional improvements, and for provision of rural water supplies in hardship and scarcity areas. Following an IDA preappraisal mission in April 1974, the GOI, GUP and IDA agreed that the project should be defined accordingly. The project was appraised in September/October 1974. 39. A credit and project summary is given in Annex III. A report entitled Appraisal of the Uttar Pradesh Water Supply and Sewerage Project (Report No. 742a) dated July 29, 1975, is being distributed separately to the Executive Directors. Negotiations were held in Washington in July 1975. The Government of India was represented by Mr. A. Pande of the Ministry of Finance and Mr. B. B. Rau of the Ministry of Works and Housing; the Government of Uttar Pradesh by Mr. S.V.S. Joneja, Commissioner and Secretary, Finance and Mr. A. Hussain, Coiamissioner and Secretary of the Local Self-Government Department; the Jal Nigam by its Managing Director Mr. A. C. Chaturvedi; and the Life Insurance Corporation of India by its Secretary of Investment, Mr. C. R. Thakore. Project Description 40. The project would promote implementation of the first phase (1975/76-1980/81) reorganization of the sector by supporting the establish- ment of the Nigam and eight Jal Sansthans. Three of these would be region- al Jal Sansthans having a total population of about 7.6 million, and an urban Jal Sansthan would be established in each of the five KAVAL towns. In ad- dition, the proposed project would provide facilities to improve service to about five million people in the expanding KAVAL towns and to about 1.2 mil- lion villagers in 2,000 villages in the regional Jal Sansthans. The GUP has notified in their official Gazette that two regional Jal Sansthans (Garhwal and Kumaon) are to be established on October 2, 1975, and the establishment of the third one (Bundelkhand) would be a condition of effectiveness of the proposed credit (Section 5.01(f) of Development Credit Agreement). 1/ The five major cities of UP -- Kanpur, Agra, Varanasi, Allahabad and Lucknow.  - 13 - 41. Rural schemes would consist of piped water supply systems using surface water sources, springs or groundwater, with water treatment plants where necessary. An average provision will be about one standpipe per 200 persons in each village. House connections would be available to consumers who are prepared to pay at rates to be determined in tariff studies (see para. 52). The population in the rural areas of the first three regional Jal Sansthans suffer water-borne diseases well above the UP average and endure the greatest water supply scarcities or hardships in the State. To assist in determining the priorities to be given to future investments, the health of rural people before and after introduction of piped water supplies will be studied by the Nigam, which will cooperate with the GUP Director of Medical Services in a rural health survey program for selected subprojects. 42. The proposed works in the KAVAL towns would include further development of existing surface and groundwater sources, extension of trans- mission, water distribution and storage systems, and programs of leakage detection and waste prevention. These facilities should be adequate to meet daily requirements for water supply in the five cities through 1981; but longer-term improvements, particularly to water treatment, would be planned as part of the project and the Nigam has agreed to employ consult- ants to assist in this part of the work (Section 2.02 of Project Agreement). The sewerage component is designed to rehabilitate existing systems in these cities and to extend collection systems in areas of greatest need in the cities. Project Implementation 43. The project would be divided into about 300 sub-projects. The Nigam would be responsible for the planning, design, financing and construction supervision of these sub-projects. The Association is satisfied that the Nigam has adequate technical staff to perform these functions. About fourteen technical reports covering all the sub-projects would be prepared by the Nigam. These reports would be sent to IDA for review prior to implementation. The design criteria which are used by the Nigam are satisfactory, and the arrangements for review of the Nigam's technical reports and for sub-project supervision would ensure that technically sound, least-cost sub-projects would be financed from the credit. 44. Disbursement of funds for any sub-project would depend on: (i) establishment by GUP of a Jal Sansthan with jurisdiction over the area in which the sub-project is located (Section 2.02(b)(i) of Development Credit Agreement); (ii) the Jal Sansthan's entering into agreements with the Nigam in a form acceptable to IDA, before construction of sub-projects begins, to take over the completed schemes and accept responsibility for the repayment of loans made by the Nigam to cover the cost of the scheme; and (iii) IDA's approval of the technical report related to the actual sub-project (Section 2.02(b)(ii) of Development Credit Agreement). 45. The Nigam and Jal Sansthans would hire qualified staff in suf- ficient numbers to carry out the proposed investment program, including  - 14 - appraisal and supervision of sub-projects, and operation and maintenance of their water supply and sewerage systems (Section 2.04 of Project Agreement). Consultants will be engaged by January 1, 1976, to advise on organization and management, staff hiring schedules, and training programs (Section 2.02 of Project Agreement). Should CUP require any of the new authorities to employ staff in excess of the agreed schedules, GUP would finance their employment (Section 2.05 of U.P. Agreement). Training programs would be implemented by the Nigam on the basis of plans prepared by consultants and agreed with IDA (Section 2.04(b) of Project Agreement). Project Costs and Financing 46. Annual investments by the GUP in the water supply and sewerage sector have increased from US$1.6 million equivalent in 1951 to US$11.2 million equivalent in 1973/74. The total cost of the 15-year sector development program (1975-1989) at 1975 prices is about US$1.3 billion equivalent, of which about US$115 million equivalent is allocated in the Draft Fifth Plan (1974/75-1978/79). This compares with capital expendi- tures of about US$34 million equivalent during the Fourth Plan period and clearly implies the need for accelerated resource mobilization of large proportions in the 1980s. 47. The proposed program of works, with consulting services and training, the size of which was determined by the amount of money likely to be allocated by GOI and GUP, is estimated to cost US$71.9 million equiv- alent, including US$11 million in foreign exchange. The principal cost components are: rural water supply schemes (US$28.0 million); KAVAL towns water supply, (US$32.7 million); KAVAL towns sewerage works (US$8.2 million); and specialized equipment, consulting services and training (US$3.0 million). Interest during construction (US$3.1 million), which will be financed by GUP, completes the total financing requirement of US$75 million. About 40% of the cost estimate has been based on final designs and 60% on preliminary designs. It includes physical contingencies averaging 15% (US$7.3 million) on base prices, and price contingencies averaging 25% (US$13.7 million) on 1975 base prices including physical contingencies. If these contingencies should prove inadequate or excessive, the basic package will be adjusted by exclusion or inclusion of sub-projects for completion of the US$71.9 mil- lion program. Engineering and administrative costs have been included at the 16% chargirig rate used by LSGED, but these overhead costs, which seem to be high, will be reviewed and adjusted as the Nigam develops accounting and costing systems in consultation with IDA (Section 4.02 of Project Agree- ment). 48. US$22.5 million equivalent, representing 30% of the total financing required, or 35%O of local costs, would be financed by the Life Insurance Cor- poratrion (LIC), which is actively involved in lending for water supply schemes In India and is interested in supporting the sector reorganization now under wa- in UP. Tne GLTP would finance US$12.5 million equivalent, representing 19% of local costs, and thie proposed Credit would provide the remainder of US$40 million equivalent. The Credit would cover the estimated foreign  - 15 - exchange component (US$11 million equivalent) and about US$29 million equiv- alent of local costs, or about 53% of total financing requirements. Resources, including the proceeds of the proposed credit, would be made available by the GOI to the CUP as part of the GOI resource allocation of the Fifth Five Year Plan. GIJP would make available to the Nigam loans and grants in the loan:grant ratio of 4:3 as capital expenditures are incurred by the Nigam. The loans will total US$30 million equivalent for not less than 18 years including 3 years of grace, at an interest rate not exceeding that charged by the GOI at its prevailing standard rate for development projects; the grants will total US$22.5 million equivalent. (Section 2.02 of U.P. Agree- ment.) 49. To ensure that the more affluent authorities are charged interest at rates commensurate with their abilities to pay, and poor Jal Sansthans are given advantage of grants and CUP's low on-lending rates, the Nigam's initial on-lending rates will be (i) in the range of 8% to 11% for the IKAVAL towns, (ii) not less than 3% for regional Jal Sansthans, and (iii) in the range of 7% to 9% for other local bodies, with such loans available for periods not exceeding 25 years (Section 4.03 of Project Agreement). 50. Tariff structures will be designed to enable each Jal Sansthan to attain financial independence from Nigam subsidies. It has been agreed that each regional Jal Sansthan will levy charges to meet its costs of operation, maintenance and debt service from 1982/83 (1977/78 in respect of those assets taken over by Jal Sansthans in the current financial year) (Section 4.04 of Project Agreement). The KAVAL towns are among the most affluent centers in UP and their consumers should be required to meet the full costs of water supply and sewerage services. However, many tariffs are now so low that several years will elapse before the satisfactory level of taxes and charges can be achieved by the responsible authorities. To encourage the establishment of taxes and charges which will meet the -full costs of these services and commence generation of surpluses for investment, GUP have agreed that the KAVAL town Jal Sansthans will achieve the following rates of return on net fixed assets in operation: (i) 2% by 1977/78; (ii) 4% by 1979/80; and (iii) 6% by 1982/83 (Section 4.05 of Project Agreement). The Water Supply and Sewerage Funds of each KAVAL town will be established with adequate working capital, including cash, to finance its initial opera- tions and to meet any cash deficits as of the date of its separation from other municipal functions (Section 2.07 of U.P. Agreement). 51. About 70% of the revenues of KAVAL towns water supply and sewerage services are derived from a water tax, which is based on an annual valuation of property. Property values have been kept artificially low since 1945 and there has been a statutory ceiling on municipal taxes, with the result that tax yields have been too low to support the services. In addition, where water charges are levied, the meters are often faulty or in disrepair and accurate charging is impossible. Billing and collec- tion systems are not well managed, and collectibles at end-March 1974 totalled US$2.1 million equivalent, compared to 1973/74 total revenues of US$4 million equivalent. During the past year, the municipal authori- ties have made considerable efforts to reduce the amounts,outstanding, and  - 16 - the Nigam has agreed to use its best efforts to require Jal Sansthans to reduce their receivables by March 31, 1977, to amounts not exceeding two months' billings (Section 4.06 of Project Agreement). The U.P. Ordinance provides for water and sewerage taxes at new higher levels, which should permit the generation of additional revenues for the Jal Sansthans. CUP intends to introduce a Bill into the Legislative Assembly to transfer responsibility for property valuation from municipal authorities to a central authority, to achieve uniformity and realism in valuations, and has given assurances to use its best endeavors to achieve this objective (Section 2.04 of U.P. Agreement). 52. By January 1, 1976, the Nigam will employ suitably qualified and experienced consultants to assist its staff and the Jal Sansthans (Section 2.02 of Project Agreement). The services-would include a review of the financial and resource generation capacity of Jal Sansthans, on which tariffs, revenue collection systems, and on-lending rates and terms for the Nigam's loans could be established. It is known that many of the waterworks being taken over by the Jal Sansthans will be in poor condition and consultants will also help the Nigam's staff to prepare expeditiously schedules of the condition and valuations of all assets as of the dates of takeover by Jal Sansthans. The Association will be given an opportunity to review and comment on the findings of these consultants. 53. The Nigam's report on eaclh sub-project will be accompanied by a statement by the Jal Sansthan concerned indicating the taxes and charges which it proposes to levy and collect from the beneficiaries (Section 2.08 (ii) of Project Agreement). Procurement and Disbursements 54. Contracts for about US$16 million equivalent of equipment and materials will be awarded on the basis of inLternational competitive bidding in accordance with IDA guidelines. Indian suippliers competlng under inter- national competitive bidding would be granted a preference Iargin of 15% or the current rate of import duty, whichever is less. After grouping of civil works, there will be about 300 contracts totaling about US$25 mill7ion equiv- alent. This large number is because of the widely dispersed sites in the three regional Jal Sansthans, whose combined areas total about 80,000 km25 and letting of contracts over three construction seasons. It is not practical to group the civil works contracts in the five KAVAI towns' sub- projects. The largest of these contracts is unlikely to exceed US$3 million equivalent and would not interest foreign contractors. Civil works may include works by force account labor, but the Nigam will not employ force account for the civil works component exceeding US$125,000 equivalent of any sub-project, without Jbtaining prior agreement of IDA (paragraph C.1 of Schedule 1 of Project Agreement). Contracts totaling US$18 million equiva- lent for equipment and materials would be either of small sizes and tin- attractive to foreign suppliers, or unsuitable for international competitive  - 17 - bidding by reasons of high transportation costs, or high dam,age risk, e.g., asbestos cement pipes. These equipment and material contracts, with the civil works contracts, would be awarded on the basis of GUP procedures for local competitive bidding which are acceptable to IDA. 55. Subject to IDA approval of sub-projects (para 43), the proposed credit would be disbursed against: (i) 100% of the c.i.f. cost of imported equipment and materials, and 100% of the foreign expenditures for consulting services and training based outside India; and (ii) 60% of the cost of civil works, and ex-factory costs of all other equipment and materials, consulting services and training. The Nigam will be authorized to seek disbursements of up to US$2 million equivalent against approved expenditures on imported equipment and materials prior to June 30, 1976, even though at the time of disbursement IDA may not yet have approved sufficient sub-projects requiring the procured goods. This measure will allow the Nigam to achieve economies by bulk purchasing for an expeditious start of the 1975/76 construction program. Arrangements satisfactory to the Association will be made to ensure correct allocation and use of these materials on approved sub-projects (Sections 2.02(c) and (d) of Development Credit Agreement). The LIC loan will be disbursed against IDA-approved expenditures on locally procured equipment, materials, civil works and consulting services. However, to assist the Nigam to finance its initial operations, the LIC will make an advance of 10% of its loan - US$2.25 million equivalent - when the first sub-project has been approved by IDA. The LIC loan will be at 7-3/4% - or the actual rate prevailing at the time of LIC disbursements - for 25 years with three years' grace (Schedule 2 of Project Agreement). Benefits and Risks 56. The proposed project is not subject to conventional financial or economic analysis, since the information on which such analysis could be based has not been generated in the sector in the past, and the sub-projects' financial rates of return will not be available until presented in the Nigam's technical reports to the Association. However, the design and investment criteria, which will be used by the Nigam for evaluation of these sub-projects, are acceptable to the Association. 57. Only about a third of UP's present population -- which, at 95 million, is larger than that of any of the Bank's borrowers except Brazil, Indonesia, and India itself -- has access to safe water supplies. The present rate of investment in the sector is not even sufficient to keep pace with the annual growth in population. Therefore, there are dangers of large-scale outbrea1s of water-borne diseases and increasing hardship due to lack of drinking water for large masses of people. Available data on health and diseases, although limited, emphasize the urgent need to improve the quantity and quality of water supplies in Uttar Pradesh. Diseases which are almost eliminated in many parts of the world are virtually endemic in UP. As an example, in the same period, 1966-70, the number of cases of typhoid reported annually per 100,000 population was 0.2 in North America and 16.0 in South  - 18 - America, compared to UP's 166.6. Pilot water supply projects in tP have successfully reduced the local incidence of diseases and mortality rates, reducing diarrhoea in clhildren under five from 24% to 5% in four years, eliminating typhoid, and reducing deaths from dysentery from 12.2 to 3.1 per 1,000 population. Rapid coverage of the entire population is not feasible, but even modest increases in the percentage of the population covered are unlikely until basic changes are made in the financing of projects in this sector. In a drive to place the sector on a self-supporting basis, the State Government has taken the first significant step in establishing the Nigam and the Jal Sansthans. 58. The subprojects have been selected with two objectives. The first is to construct facilities to meet the water demand in the IAVAL towns and expand their sewerage systems to cover selected unserved areas. Since the KAVAL towns are the major industrial centers of the State, the implication of not improving the facilities to meet demand could be to adversely affect the industrial development in these areas. The second objective is to alleviate the drinking water problem for large masses of people living in areas of difficult terrain and scarcity in the State. Care will be taken to ensure that the subprojects themselves are least-cost solutions using appropriate discount rates. For example, the emphasis in the IAVAL towns' projects has been to modify and use existing water treatment facilities to produce additional quantities rather than construction of entirely new facilities. Similar approaches to treatment plant design, which would emphasize the use of local materials and resources, will be adopted in all subprojects. Certain components, the urgency of which was not self-evident, have been either eliminated from the subprojects, or postponed to later stages in the program. 59. The paucity of data, especially in the rural areas, makes any quantification of the economic benefits of this project impossible. Yet, to the extent that improved sanitation and increased water supply contribute to better health and upgrading of social well-being, the project will contribute to overall economic welfare. Given this assumption, which is based on evidence recorded in other countries, the question of economic justification is essentially one of project cost, composition and geographic distribution. The considerations which led to the choice of the project areas and the steps taken to ensure that project cost is brought down to a minimum are indicated in para 58. The health survey to be conducted by GUP, under the aegis of the project (para 41), will permit measurement of the impact of the project on health improvement and possibly help to establish guidelines for further water supply development policy in the State. 60. Although the establishment of these institutions is an enter- prising and constructive step in trying to resolve the complex and ex- tensive problems of this sector, there are a number of untested features. These include: (i) the ability of as yet unrecruited financial, adminis- trative and managerial staff; (ii) the capacity of regional Jal Sansthans  - 19 - to operate and maintain systems in large territories, particularly in view of the consumers' lack of education and their unwillingness to protect their systems, and the potential backlog of repairs and rehabilitation of existii:g systems; and (iii) the ability of urban Jal Sansthans to effectively charge and collect from all consumers having water supply and sewerage connections, and to obtain satisfactory property valuations as bases for water tax on unmetered connections. 61. Nevertheless, the Association's investment in the project is justi- fied because of the impact it would have on the future development of the sector which will affect more than 100 million people. UP State in India was selected for this approach because of the availability of a large and competent engineering staff which could serve as the nucleus for developing an adequate organization for handling the sector administration, project study and design, economic evaluation, procurement, construction supervision, operations and maintenance. In dealing with a problem of such a large mag- nitude as in UP, the Association's most effective role is a catalytic one; since it cannot provide all the financing required to implement the needed program, it can make the maximum contribution to the sector by participating in the development of the institutions needed to generate resources within the sector itself. 62. The project will help to impose financial discipline and improve financial management of the sector. Although the funds allocated for the sector in the Five-Year Plans are small in relation to the needs, the amounts involved are large. The multiple channels through which these funds are provided and the accounting systems used, take it difficult to assess the efficiency of overall sector investments. The proposed project will help to address this issue, because it approaches the sector as a whole. In addition, the accounting system will be changed to enable determination of full costs. Existing pricing policies will be reviewed and adjusted to increase the revenues from water supply and sewerage operations and to distribute the burden on the consumers more equitably. PART V - LEGAL INSTRUIENTS AND AUTHORITY 63. The draft Development Credit Agreement between India and the Association, the draft Uttar Pradesh Agreement between the State of Uttar Pradesh and the Association, the draft Project Agreement between the Associa- tion and the Uttar Pradesh Rajya Jal Sambharan Tatha Sewer Vyawastha Nigam, the Recommendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement, and the text of a draft Resolution approving the proposed development credit are being distributed to the Executive Directors separately. 64. Features of the draft agreements of special interest are referred to in paragraphs 30, 35, 42-45, and 49-55 of this report. Additional con- ditions of effectiveness include: (i) legislative action on the provisions  - 20 - of the Ordinance has been completed (Section 5.01(d) of Development Credit Agreement); (ii) Uttar Pradesh has made available a working capital of not less than Rs 16,000,000 to the Jal Nigam (Section 5.01(e) of Development Credit Agreement); (iii) the Bundelkhand Jal Sansthan has been constituted (Section 5.01(f) of Development Credit Agreement); and (iv) the LIC-Jal Nigam Agreement has been executed (Section 5.01(g) of Development Credit Agreement). 65. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATIONS 66. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamar-a President Attachments August 6, 1975  AmXsI I COUNTRY DATA - INDIA ARiA POPULATION Dm3SI1 3,20,B.83 kh2 577.0 miton (mid-1973) 350 Per kmhof arable land SOCIAL IIDICATORS Reference Countries India flLnd Philippines U. K. * 19690 1970 jfVlYU ly9l UN? PER CAPITA US$ (ATLAS BASIS) A * 110 /a90 gL 220 ^ 2,600 j DE01GRAPHIC Crude birth rate (per thousand) 38 b 38 Atd is /dL 45 13.9